Friday, May 16, 2008

Some Scenarios Worth Considering

Bear with me while I talk just a little more about our new mortgage.

Everyone's heard of ways to accelerate a mortgage by paying an extra payment each year or by adding a few extra dollars to the principal each month. A person could save a little money by doing that, couldn't they? But how much? And is it really worth it? I've decided to find out by plugging in some real life numbers...ours.

Being one to lay everything out on the table, I will tell you that our mortgage is for $104,361, with a payment of $703 a month (interest and principal only, not the taxes, PMI or insurance escrowed into it) . I plugged these amounts, as well as the interest rate and terms of the loan into this Bankrate calculator. According to the amortization table, over the life of the $30 year mortgage, we will pay $148,121 in interest over the life of the loan. The loan will pay off in July 2038.

Shane and I decided that we'd like to add an extra payment each year toward the principal. Instead of saving it up and paying it once a year, we'd like to spread it out over the 12 payments. That's $58.58 a month. If we do that, the total amount of interest will be reduced to $111,306 (a savings of $36,815) and the loan will pay off more than 6 years earlier.

What if we add $69.38 each month? First, let me explain that figure -- it's our principal, interest, taxes, insurance and PMI, rounded up to the next hundred. It makes for easy bookkeeping. If we were to add that much each month, over the life of the loan, our total interest would be $106,668. We'd save $41,453 and the mortgage would pay off more than 7 years earlier.

Even a very modest amount, say $10 extra each month toward the principal, is well worth it. The mortgage would pay off 15 months early, and we'd save almost $8300 in interest. Obviously, even the smallest amounts (in this case, just 33¢ a day!) can make a huge difference. It's most definitely worth the time and trouble to save back a few dollars to add to your mortgage principal each month. Or to the principal of any loan, for that matter.

Our focus right now is getting the van paid off as soon as we can. But we're also going to aim for adding a few extra dollars a month to our mortgage principal payment, about $70 when we can, but at least a few dollars if we can't swing the entire $70. It all adds up.


ajooja said...

The payment on our first mortgage was $344 a month. We were locked into a decent rate but everyone told us we should refinance as soon as possible.

Of course, "as soon as possible" takes about 10 years for us. Besides, we certainly didn't mind having such a low payment.

We paid off a lot of debt when we refinanced but we built it back up really quickly.

We had a similar loan to yours where we had to refinance again to get locked in to a decent rate.

We have a decent rate but we didn't really get any more money upfront or gain anything on the back end.

We're basically where we were before (interest-wise) but now our payment is about $800 a month.

I don't "remember" the paid-off debt but I sure remember the old $344 payment.

Donna said...

Great decision sweetie! Every dollar counts!!!hughugs